Saturday, September 20, 2008

Last week, we experienced an extremely oversold market that led to a classic capitulation as our global financial system shook to its core. This was telegraphed by very high “new lows” readings, high “down-volume to up-volume ratio” readings, and also very high VXO and VXN readings (based on our Sigma Channels patterns). Sunday marks the Fall Equinox. As I have written every year, within +/- 2 days, Fall Equinox often marks a key reversal for the markets—in this case, mostly likely to the upside.

Comrade Paulson (who was just awarded his second Order of Lenin Medal for his Thursday Night Massacre of Net Short Hedge Funds) and Uncle Ben timed the US Government's $700+ Billion taxpayer (read: poor) bailout of our investment banks (read: super rich) extremely well—just hours ahead of expirations of September Equity Index Futures and European-style Equity Index Options. (Seriously, I consider this a brilliant move that truly did save the integrity of our equity and credit markets and, perhaps, Capitalism as well, from a meltdown).

For the next two weeks, we suggest that you stay the course and keep your longs in tact. We expect a "local" peak around Oct 2nd / 3rd and a "local" trough by Election time (Nov 4th).

Thursday, September 18, 2008

Over the past 8 weeks, we alerted clients that the gold/oil ratio would continue to recover from its July record lows as oil begins to underperform gold. The latter would recover as the dollar drops on deteriorating macroeconomic fundamentals and further erosion in financial markets, thus, triggering re-emerging expectations of Fed cuts. Ever since the gold-oil ratio bottomed to a record low of 5.8 in July-courtesy of soaring oil prices relative to gold, the rebound was inevitable, especially as the ratio was well below its 37-year monthly average of 13.0 (see dotted horizontal line).

The latest jump in gold oil prices to a 5-week high of $895 per ounce and the simultaneous dip in oil prices below $92 per barrel is consistent with the aforementioned analysis. The chart below shows each time the gold/oil ratio had bottomed, a rebound was accompanied with a US recession, Fed easing and dollar weakness (accompanied by rising gold). In fact, since 1972, each of the last five U.S. recessions was preceded by 20-30% declines in the gold-oil ratio from its most recent highs. (See attached file )

RATIONALEDuring economic expansions, rising demand for industrial metals and energy boosts both oil and gold prices, thus leading to a rising or steady gold-oil ratio. But when substantial advances in oil are the result of supply factors (political risk, wars, acts of god, labor union action, OPEC action/rhetoric, refinery shutdowns and falling inventories), oil prices tend to overshoot, clearly outpacing any gains in gold in relative terms, producing cost and inflationary repercussions for importers and consumers.

The chart shows how bottoms in the gold/oil ratio (shaded areas) were followed by declining or contracting GDP growth. In each of those cases, the Fed was obliged to cut rates and the dollar sustained fresh damage.

1973-75 Recession1974 quadrupling of oil prices triggered sharp run-ups in US gasoline prices and a subsequent halt in consumer demand. Resulting USD drop pushed gold up by 15%. But faster oil appreciation dragged down gold-oil ratio from a high of 34.0 in July 1973 to 23.2 in October of the same year, before extending its fall to12.2 in January 1974. By 1974-75, the U.S. and the major industrialized economies had fallen into recession.

1980-82 RecessionTumbling dollar and record oil main culprits to the 1980-82 recession. Gold-oil ratio dropped from 15.3 in January 1979 to 11.4 in August 1979 due to a doubling in oil to $29 and a more modest 30% increase in gold.

The 1977-79 dollar crisis forced OPEC to further hike prices to offset FX value of oil revenues. Iran revolution endangered oil supplies, thus ensued a 200% increase in oil between 1979 and 1980, giving rise to the second oil shock within less than 10 years.

The Gold-oil ratio fell anew from early 1981 to mid 1982 as oil remained around the mid $30s while gold plummeted from the $830s territory to $400 on waning impact of Soviet-Afghan. In summer 1981, the gold-oil ratio dipped to a 4-year low of 11.4 amid plummeting gold and stable oil, then onto 9.0 in Summer 1982, in line with the deepening 1981 recession which extended into mid 1982.1985- 86 SlowdownIn autumn 1985, the gold-oil ratio bottomed at 10.6 from its 16.9 high in February 1983 due to relative stability in gold & oil. 35% decline in gold-oil ratio proved successful in signaling the 1985-1986 slowdown and resulting Fed rate cuts in February-July 1986.Unlike in prior cases of falling gold-oil ratios, GDP growth avoided a contraction partly due to the offsetting positive effects of 1986 oil price collapse following OPECs flooding of oil.The same idea applied for the recessions of 1990-91, 2001-2 and the current slowdown which has yet to called a recession.

Tuesday, September 16, 2008

Risk aversion is increasing looking like a pendulum swinging violently, with both extremes signifying heightened fear, with the lowest point of the pendulum reflecting short-lived reductions in aversion. Barclays announcement to reject the purchase of Lehman, the confirmed bankruptcy of Lehman and Merrill Lynchs announcement to sell itself to Bank of America each signified a rapid reduction in risk, which was principally guided by broad dollar declines and yen rallies. Temporary relief in volatility and risk aversion were triggered by announcements from a group of international banks forming a $50 bln fund to save help troubled banks.

Careful with FIFO Analysis on CurrenciesA major fundamental argument sustaining the prior dollar rally was that of First-In-First Out (FIFO), supporting the hypothesis of the US recovering earlier than Europe because it had preceded it in entering the global slowdown and has delivered more aggressive fiscal and monetary measures than the old continent. While this notion is partially true, it overlooks the fact the impaired US banking capital and broadening credit woes (in interbank market and hedge funds) are the main factors distinguishing the US challenges from those in continental Europe. Stated differently, the Eurozone patients may have joined the global intensive care unit well after the U.S., but it in no way suggests that their condition is more critical than that of the U.S. Consequently, the collapse of Fannie/Freddie and Lehman, and near collapse of Merrill Lynch exemplify the repercussion on the increasingly fragile consumer fabric and employment foundation. The argument for Fed rate cuts is not only aimed at shoring up liquidity or inter-bank confidence, but adding from what remains of the Feds firepower to the ailing economy.

A Cut in the Discount Rate or Fed Funds?As in August 2007, the Fed may be expected to try markets reactions with a rate cut in the discount rate rather than in the Fed funds rate to further increase banks access to the feds lending window. The discount rate currently stands 25-bps above the 2.00% Fed funds rate, half than where it was before the beginning of the easing campaign last August. At a time when the Fed has tripled the period of term loans to banks and expanded the range of loans it could buy from banks, it only makes sense to lower the discount rate down to the Fed funds level. The Fed's inflation priorities are now largely overwhelmed by their obligation to save the financial system as well as the economy.

Since June, I have been predicting that the next interest rate change will be down than up, compare to majority of pundits who had expected rate hike. Here are the articles June 27 and June 18 .

Planet Alignment for a Dollar Top?The charts below show confluence of macro forces acting to halt the dollar rally. US dollar index gives way at the 3-year trend line resistance of 80.70, while EURUSD stabilized last week at the major support of $1.3877, which is near the 3-year trend line (blue line) and 50% retracement of the rise from the $1.1638 low (Nov 2005) to the record high of $1.6036. Similarly, oil's decline has yet to breach the $98.66 support, which is the trend line support from the January 2006 low. Gold shows to have bottomed at $745, which is just above the key support of $730 support (previous resistance in May 2006) and the 50% retracement of the rise from the March 2005 low to this years fecord high.

The fundamental underpinning of these chart formations is emerging from the latest woes in Wall Street and from a possible reduction in the dollars yield foundation in the discount rate. We continue to expect 50 bps in the fed funds rate, with the most plausible scenario occurring between Tuesdays FOMC meeting and the October meeting. But we are not yet ready to pronounce the end of the dollars upward correction due to what may occur in European banks ties to Lehman as well as the macroeconomic weakness in the continent.

CHF and JPY continue to outperform across the board, especially against the wobbly USD and GBP. USDJPY seen capped at 106.20, with pressure pulling back towards 105.20 and 104.80. USDCHF eyes 1.1160, EURCHF eyes 1.5850, AUDJPY capped at 86.20, eyes 84.60 and 84.20.

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Fari Hamzei is frequently quoted by Benzinga, StocksNJocks, CNBC, Bloomberg, FoxBusiness and RealMoney. His book, Master Traders: Strategies for Superior Returns from Today’s Top Traders, published by John Wiley & Sons in October 2006, immediately become a bestseller on Amazon trading books space. Three times, Fari has been the featured advisor on Timer Digest monthly newsletter when each time he was ranked FIRST in the Nation for the previous 12 months among 150 market timers. More recently, in August 2015, he was ranked SECOND in the country, then moved to FIRST place in October 2015. In December, he briefly was ranked SECOND and since first week of January 2016, he has been ranked ONE in the Nation till present.

From 2006 to 2011, once or twice per year, Fari has taught his Proprietary Sentiment Indicators at The Options Institute of CBOE. And, he often shares his methodology on CBOE Options Hub.

Fari is a graduate of Princeton University with a BSE degree in financial engineering, and studied financial derivatives with Options Theory luminaries such Jack Shelton, Ed Thorp, Robert Geske, Richard Roll & Robert Whaley (inventor of original VIX) at UCLA Anderson Graduate School of Management. He was manager of the Operations Analysis Dept and then was promoted to the director of Strategic Planning at Northrop Grumman Corporation's Aircraft Group after being recruited only 5 years earlier from college. He also served for eleven years on the Board of Directors of Electronic Clearing House (ECHO), now an Intuit company (INTU).Read Fari's Recent PostsBrad Sullivan is a member of both MERC & CBOT Exchanges, and trades for his own hedge fund in Chicago. His comments posted in our HFT Premium Chatroom, is read each day by many active index, debt and commodity futures traders.Read Brad's Recent PostsMark "SPO" Esposito aka The Admiral, has traded as a sole proprietor and as a partner in the Designated Primary Market Maker (DPM) structure at the CBOE for 27 years. During the late 80’s “SPO” was regarded as one of the most active and largest traders on the CBOE Floor. Experiences like trading the crash of 1987 and the tech bubble burst of 2000 proved invaluable in understanding option volatility. Extending those experiences in mentoring of many individuals helped develop many successful traders during his tenure. While serving in the CBOE committee structure he was integral in the CBOE transition from open outcry to hybrid (open outcry + remote market making). He was then recruited by OneChicago as its Managing Director of Business Development. After 12 years at OneChicago, in mid-December 2015, he joined HA to run our HFT Options Trading. Today, strategy and trading analysis are part of his many active roles.
Michael Blythe's trading experience began at the beginning of the 2nd Iraq War in 2003 as an intern for an institution on the AMEX floor that would later become part of Charles Schwab. From there he became responsible for hedging an agricultural operation until 2008, when a month before the Lehman Brothers fall, he accepted a role to manage fixed income trading for an 'accredited investor' trust which periodically took him to the CBOT floor to work with seasoned strategists. Since then he has gained education and experience working with one of the featured traders in the Market Wizards series and is currently completing a degree from the London School of Economics.Read Michael's Recent PostsPirouz Hendi graduated from California State University Fullerton with a BA in Business Marketing. Pirouz started his career in the financial industry at Prudential Securities in 1999 as a licensed Stock broker after successfully completing series 7, 63 and 65 securities exam up until 2003. Pirouz has been an independent trader in the equities market since 2007 with primary focus on individual stocks and ETFs. Pirouz has successfully completed the beginner level of CBOE option courses and is planning on completing their intermediate and advanced level courses as well.
Vic Sehgal is a Volatility and ETF trader. Currently trading for private clients, Vivek has been in the industry since 2005. He worked with Merrill Lynch Private Client Group from 2005-2009 and then moved on to the NRI group at the flagship Merrill Lynch office at World Financial Center. During his time with Merrill Lynch, Vic was a successful Financial Advisor, working with elite clients from the tri-state area.
Vivek resigned from Merrill Lynch in 2009 when it became BofA. He moved to an independent firm, Newport Coast Securities and worked there with his clients till 2011.
From 2011 till 2015, he worked with JSM funds as CEO and head trader.
Vic is very experienced in trading ETFs, and Volatility. He is a technical trader, and had worked closely with Hamzei Analytics since 2012. He closely follows Hamzei Analytics ideology and applies those principals to ETF and Volatility trading.
Steve Shobin, the former Vice Chairman & Chief Investment Strategist for AmeriCap Advisers, LLC, is a veteran of more than four decades on Wall Street where he was a Managing Director at Lehman Brothers, Inc. and a First Vice President at Merrill Lynch. Mr. Shobin was a senior member of the research divisions at both firms. During his tenure, he developed unique methodologies for projecting the long term trends of stocks and industry groups, incorporating various techniques for controlling risk. Mr. Shobin has advised some of the world's largest mutual funds, hedge funds, and institutional investment managers on stock selection and portfolio structuring. Steve has been a member of the Institutional Investor All-American Research Team in 1997, 1998, 1999, and received a #1 ranking in the year 2000 just as he was leaving Lehman to join AmeriCap Advisers.
Jason Goepfert is President of sentimenTrader.com. He has been trading stocks, stock and index options, index futures, currencies and commodities for over 15 years. He holds several securities licenses and has most recently managed the operations of a $3B hedge fund and top-10 online brokerage (Gomez rankings). Jason founded sentimenTrader in 1998, and began a web presence in 2001. Currently, the site has subscribers in all 50 states and 40+ foreign countries. In 2004, Jason was awarded the prestigious Charles H. Dow Award for Excellence in Technical Analysis by Market Technicians Association.Read Jason's Recent PostsJeffrey Spotts, CMT, a contributor to Master Traders, is a hedge fund manager for Prophecy Funds. He has more than 16 years of experience providing portfolio management to corporations, institutions, and high-net-worth clients. He began his career in 1989 at Merrill Lynch Private Advisory. He was responsible for over $500 million of client assets under management. In May 2001, he launched Prophecy Asset Management, a technically managed hedge fund catering to institutions, pensions and family offices. He also teaches a behavioral finance segment of a graduate studies course for several colleges.
Read Jeffs's Recent PostsFil Zucchi is the founder and manager of Zebra Investment Advisors LLC, a Virginia registered investment advisor, and Zebra Fund, LLC, a long/short hedge fund. Before founding the Zebra companies, Fil managed individual long/short accounts. Prior to that, he was a bankruptcy and commercial litigation attorney in a Washington, D.C. law firm. Fil was a contributor to theStreet.com Street Insights. Fil is also currently involved in his family’s commercial real estate development and management operations.Read Fil's Recent PostsDavid Miller, a contributor to Master Traders, is the CEO and co-founder of Biotech Stock Research, LLC, publisher of Biotech Monthly. Launched in October 2001, Biotech Monthly combines a monthly newsletter format with alerts on breaking news on more than two dozen development-stage biotechnology companies under coverage. His firm is one of the few independent research firms in that it accepts no money from the companies it covers, does no outside consulting in the biotech space, runs no mutual or hedge fund, and is 100 percent subscription-supported. In addition, David was CEO of a successful technology company and a university professor.Read David's Recent PostsFrank Barbera, CMT, a contributor to Master Traders, is a co-manager of the Caruso Fund, a $35 million hedge fund that seeks to make gains trading precious metals, stocks, and currencies. He began his career in the early 1980s working with John Bollinger, Bill Griffith, and Susan Herrera at Financial News Network in Los Angeles. After FNN, Frank spent 10 years as an on-air market analyst for KWHY-TV in Los Angeles. His first money management position was at the Kavanaugh Fund in Santa Monica, a hedge fund subsidiary of Goldman Sachs. His technical work in gold and gold stocks is considered among the best in the industry.Read Frank's Recent PostsTim Ord, a contributor to Master Traders, is the president, editor and publisher of The Ord Oracle, established in 1990, which is an electronic advisory newsletter that recommends S&P, NASDAQ, and gold stocks trades. He is frequently listed in the top 10 market timers in the country. Timer Digest ranked Tim No. 5 in gains for the S&P and No. 2 for gold timer in 2004. He has more than 25 years of trading experience and placed fourth nationally in the option division in the United States Trading Championship in 1988.Read Tim's Recent Posts